A for artificial intelligence, B for base effect: The A-Z of Q3 earnings season

A: Artificial Intelligence

In line with estimates, Indian IT firms delivered a weak set of numbers in the quarter gone by due to macroeconomic headwinds in the US and Europe, their biggest markets. The slowdown in discretionary spends and delays in deal conversions weighed on their topline.

However, company managements enthusiastically tried to brighten the mood during the post-earning concalls by deploying the hottest buzzword in town — artificial intelligence.

From TCS, Infosys, and Wipro to the small and midcap players, companies were at pains to highlight how they are taking the lead in generative AI.

Analysts, meanwhile, urge investors to resist the temptation of counting the chickens before they hatch.

“Indian IT service companies see the demand for new age technology like generative AI, IoT (internet of things), machine learning, etc., despite the lack of near-term visibility,” Axis Securities noted.

B:  Base Effect

The aggregate earnings of BSE-500 companies were robust and resilient.

While PAT (profit after tax) growth was strong at 26%, it was down sequentially (from 58% in 2Q FY24), as the positive base effect is now dwindling, according to Emkay Research.

C: Cyclicals

Domestic cyclicals such as autos and financials, along with global cyclicals (metals and oil & gas) drove the earnings.

Brokerage house Motilal Oswal said the aggregate earnings of the companies tracked by it rose 29% year-on-year (YoY), versus its estimate of 19%.

“BFSI clocked 22% YoY growth (vs an estimate of 17%), while autos registered a growth of 60% YoY (vs an estimate of 34%). Metals earnings jumped 74% YoY (compared to an estimate of 25%) over a weak base of 3QFY23, led by Tata Steel, JSW Steel, and Coal India,” it added.

D: Declining Headcount

India’s top four IT companies — TCS, Infosys, Wipro, and HCL Tech — hired a paltry 1,940 employees on a net basis in the third quarter of FY23, down 93 percent from the previous quarter.

The net additions had fallen 45 percent to 28,836 employees in the second quarter from the first quarter, when 52,842 employees were recruited. The IT majors reported a decline in headcount for the 5th consecutive quarter, according to Jefferies.

E: Emerging Stars

One of the most heartening developments of this earnings season was the profitability of India’s listed startups. Zomato, Policybazaar, and Delhivery, which were loss-making in Q3FY23 have come back in the black in Q3FY24. Two more — Nykaa and Mamaearth — have also grown their profits by 2X and 3X, respectively, YoY.

A conspicuous absentee from this list? Paytm, which, however, did manage to narrow its net loss to Rs 221 crore, from Rs 392 crore in the year-ago period. Of course, this once-high-flying fintech star has much bigger things to be worried about at the moment.

F: Fallen Angels

Call it the weight of expectations. Or just the law of averages catching up. But when India’s largest FMCG company, largest paints firm, and biggest private sector lender simultaneously run into headwinds, the market takes notice.

Hindustan Unilever’s standalone net profit increased just 0.55 percent on-year to Rs 2,519 crore, while revenue dipped 0.38 percent to Rs 14,928 crore. Both the numbers were down sequentially — a rare event for HUL. Underlying volume growth came in at a measly 2 percent, as against 5 percent for the year-ago quarter.

HDFC Bank's net profit rose 33 percent on-year to Rs 16,372 crore, but it included a one-time tax gain. Crucially, both its net interest income (NII) and net interest margin (NIM) came in below expectations, showing the lingering impact of the merger with HDFC.

Asian Paints clocked a healthy 34 percent jump in net profit, but failed to enthuse analysts. Antique Stock Broking said Asian Paints’ sales performance was below expectations. In view of the demand challenges and the expected increase in competition (Grasim’s paint sector foray), it expects moderation in volume growth momentum in the coming quarters.

G: Gross Margin Expansion

Declining raw material costs gave a lift to the gross margins of auto, cement, paints, and FMCG companies.

Gross margins across staples companies are improving as key raw material prices such as crude, palm, and packaging materials remain stable.

“Domestic margins have climbed up to 9-quarter highs, but still some headroom versus pre-Covid levels is there,” global brokerage firm Jefferies said.

H: Heavyweights On The March

Nifty delivered a strong beat with a 17% YoY PAT growth (versus Motilal Oswal’s estimate of 11%). Five Nifty companies — Tata Motors, HDFC Bank, Tata Steel, ICICI Bank, and JSW Steel — comprised 56 percent of the YoY earnings growth. Ex-metals and oil & gas, Nifty’s earnings were up 15% YoY (versus estimates of 10%).

I: Industrials

Industrials stood out as a top performer, on both growth and margins. Capital goods firms like L&T, ABB, Siemens, and Thermax saw a quarter-on-quarter (QoQ) slowdown in order inflow but a robust 20%+ YoY growth despite a higher base, Jefferies noted.

Engineering giant L&T’s earnings, considered a proxy for the country’s infrastructure development expenditure, saw 22 percent growth.

J: Jewellery Sparkles

Jewellery was one of the few segments in the discretionary basket which shrugged off demand headwinds.

``Jewellery demand was boosted by the festive season during 3Q24, along with a rally in gold prices (16% y-y). The competitive intensity from unorganised and smaller organised players seems to have picked up, making the incumbents up their marketing spends,” analysts at Nomura said.

Titan reported a 20 percent jump in revenue,  to Rs 13,052 crore, but total income from its jewellery segment increased 23 percent to Rs 11,709 crore, with the Indian business growing 21 percent.

"We will watch the near-term consumption trend but will continue to like Titan for its best-in-class execution track record, and its hunger to keep expanding the user base. Consumers’ preference for branded jewellers will continue to keep the category growth at an attractive level," Motilal Oswal said in a note.

K: K-shaped recovery

The India vs Bharat dichotomy was evident in the management commentary of FMCG and consumer discretionary players — robust demand for premium products in urban markets but continuing sluggishness in rural India. In other words, a ‘K’ shaped recovery seems to be underway.

Case in point: India’s largest carmaker Maruti Suzuki, which posted a healthy 33 percent on-year jump in Q3 net profit, at Rs 3,130 crore.

“The small car segment continued to remain muted and passenger vehicle sales volumes fell 16 percent YoY. Aided by a strong SUV lineup, the company’s market share in the SUV segment improved to ~21 percent,” analysts at Geojit said.

A similar script played out in the FMCG industry. “As Indian consumers experience a rise in purchasing power, there is a growing tendency to opt for premium and branded products. This premiumisation trend is expected to be a key driver of the overall growth of the FMCG sector,” Axis Securities added.

L: Loan Growth

Banks continued to report healthy credit growth, largely led by the retail / SME segment, with some pick-up in corporate lending. Bank credit is growing at 16 percent, faster than the GDP growth of 9 percent, implying a credit multiplier of 1.7X, Jefferies said in a recent note.

“This is being aided by stronger growth in consumer loans, a ramp up in segments like SME, inflation-led growth in working capital credit, and some uptick in capex activity," it added.

Non-banking finance companies (NBFCs) too logged strong loan growth, which was, however, offset by NIM compression.

“While sequential trends in NIM are encouraging (reflecting near bottoming), loan growth may moderate on a high base and softening momentum in select segments,” as per Kotak Institutional Equities.

M: Mobility Booster

In 3QFY24, auto volumes (ex-tractors) grew 16% YoY (flat QoQ) led by healthy recovery in two-wheelers, stable growth across other segments, and a lower base due to a difference in the festive season. Two-wheelers witnessed the sharpest growth of ~19% YoY during the quarter.

Tata Motors saw the biggest earnings upgrade for FY24-25 in the coverage universe of Motilal Oswal.

N: Net Interest Margins

A common thread running through banks’ Q3 numbers was the pressure on the NIM — which is a measure of the amount of money a lender earns in interest on loans, compared to the amount it pays in interest on deposits.

With system liquidity tightening and the Reserve Bank of India (RBI) yet to commence its rate cutting cycle, banks are forced to offer higher interest rates to attract depositors, thus putting pressure on NIMs.

“We expect the full-year margin of this year to be similar to last year. That implies some further margin compression in Q4, but it should be much lower than what we have seen,” Anindya Banerjee, Group Chief Financial Officer at ICICI Bank, told analysts during the bank’s post-earnings concall.

O: OMCs Shine

State-owned oil marketing companies (OMCs) had a standout quarter on the back of improved margins as a freeze on petrol and diesel prices despite a fall in crude prices helped recover losses incurred when crude was more expensive, in 2022-23.

Indian Oil Corporation (IOC) clocked a whopping 1,071% on-year jump in net profit, at Rs 8,577 crore, while BPCL and HPCL saw an increase of up to 206%.

P: Pension (Pain)

India’s largest public sector lender had a characteristically PSU problem — hefty pension and wage bills.

SBI’s Q3FY24 net profit plunged 35 percent to Rs 9,163 crore due to one-off additional provisions of Rs 5,400 crore towards pension, and Rs 1,700 crore for dearness allowance (DA).

Analysts, however, looked past this one-time hit to focus on the positives — comfortable loan-to-deposit (LDR) ratio, healthy loan growth (up 15% YoY) and pristine asset quality (net NPA ratio at just 0.64%).

Q: QSR

Despite a big sporting event (cricket World Cup) and the festive season, Q3 saw flat sequential growth for quick service restaurants (QSRs) versus mid-to-high single-digit pick-up historically.

This was likely led by low disposable incomes (indebtedness / inflation), and shift of spends to other categories like travel, according to Emkay Research.

“While the management commentary indicated more pain for the on-premise channel (in-restaurant dining), we believe the off-premise (online) channel  is also struggling, given the widening difference in growth for aggregators and QSRs,” it added.

R: Rural Demand

A key takeaway from the Q3 results of consumer staple firms is the continued weakness in rural demand.

“FMCG companies have reported muted performance due to sluggish rural demand and increased competitive intensity, affecting overall volume growth. However, there is optimism for demand recovery in the coming quarters, which will be driven by easing inflation, increased government spending, and higher remittances,” analysts at Axis Securities noted.

At its post-earnings call, HUL’s management said the Q3 demand trend was similar to that of Q2, with urban demand growing ahead of rural. Dabur was the only FMCG company to see higher  rural than urban growth in Q3.

S: Stable Asset Quality

Banks had no cause for complaint on the asset quality front, with Q3 being another quarter where the non-performing asset (NPA) trends remained benign. The proportion of delinquent (overdue) loans and the stock of non-performing loans (NPLs) — those in arrears for more than 90 days — has been coming down sequentially for PSU banks.

Even the non-NPL stress book (restructured advances) has been broadly under control and not a source of worry, Kotak Institutional Equities said.

“Gross slippages for the sector continued to be in control and have shown a decline QoQ. Slippages for frontline banks are near or even below pre-Covid levels,” it noted. Asset quality is unlikely to be a concern for most banks in the medium term, unless there is a sharp macroeconomic downturn, which is unlikely, it added.

T: Tobacco Troubles

No earnings review is complete without mentioning the crowd favourite – ITC. The cigarettes-to-hotels major’s December quarter revenue from operations rose 2 percent to Rs 17,651.85 crore, falling short of analyst estimates, mainly due to below par performance of its cigarettes segment.

“At the recent analyst meet, ITC's Chairman highlighted the possibility of consolidation in near-term cigarette volumes, after reaching nearly a 10-year-high. This played out in 3QFY24, with cigarette volumes declining 2% YoY, and cigarette margins seeing headwinds from input cost inflation (tobacco, filter rods),” Jefferies said.

The brokerage house expects volume growth to remain tepid in the near term, in the 0-3% range.

U: UnReal Estate

If you think it’s just the equity markets which are at stratospheric levels currently, a casual chat with your neighbourhood real estate broker might serve as an eye-opener. Nifty Realty was the top performing sectoral index last year, and the bullishness was in full display during the companies’ December-quarter numbers.

Listed real estate firms saw pre-sales rise 85% YoY on strong volumes aided by new launches, and pricing growth of more than 10% in most markets, Jefferies highlighted.

The country’s largest listed realty firm, DLF, saw a 15-year-high quarterly profit, all-time high pre-sales, and a free cash flow (FCF) of Rs 1,000 crore in the third quarter of the current fiscal year.

V: Volume Signals

Most FMCG and consumer discretionary firms reported headwinds in volume growth – offering some glimpses into underlying macroeconomic health.

“FMCG industry volume growth at 6.4% y-y (in Q3) appears to have moderated q-q (8.6% y-y in 2Q24), but on an absolute basis it has remained the same for the past three quarters,” analysts at Nomura noted.

Demand recovery in staples and consumer discretionary was slower than expected despite a moderation in inflation, as consumers still seemed to be cautious about spending and focussed on need-to-have consumption, with nice-to-have consumption and upgrades to better products getting stalled, it added.

W: War For Deposits

With credit growth outpacing deposit growth by a wide margin, banks are seeing heightened competition for garnering deposits.

“Certain banks have signalled  lower growth in bulk deposits. Thus, continued pressure on deposit mobilisation will weigh on either margins, or growth, or both,” Axis Securities said.

According to the latest data from the RBI, term deposit rates were up ~180 basis points (bps) to ~6.8% from a bottom of ~5.0%. Both private and PSU banks had kept their term deposit rates stable for almost a year.

``We have seen some large private banks hiking term deposit rates by 10-15 bps in the past couple of months. In our view, the outlook on NIM stays uncertain, as the competition for deposits to fund business growth could exert further upward pressure on deposit rates,” Kotak Institutional Equities said.

X: X-Factor

If IT companies got a narrative boost through their use of ‘AI’, a consumer staples firm set the Street buzzing with some product innovation.

Godrej Consumer Products Ltd (GCPL) launched its Goodknight Agarbatti, India’s first, legal anti-mosquito incense sticks. The anti-mosquito incense sticks business is currently a Rs 1,200 crore market that’s dominated by unorganised players. The Godrej incense stick uses a new molecule — Renofluthrin (RNF) — which is exclusive to GCPL for the medium term.

At its post-earnings call, more than half of the questions posed by analysts to the management pertained to this new product.

Y: YoY Trends

The earnings growth of large and midcap  firms in Q3 was comparable as largecap grew 20% YoY, and midcaps grew 21% YoY, according to HDFC Securities.

The brokerage firm’s coverage universe of 224 stocks saw an aggregate revenue growth  of 5% YoY, while PAT jumped 20%. Further, 77% of  the earnings growth came from only three sectors — energy (33%), auto (24%), and metals (20%).

Z: Zzzz

Here’s what a typical post-earnings conference call of India Inc looks like:

Management: Ladies and gentlemen, good morning / afternoon, and welcome to our Q3 FY'24 earnings conference call. [spends the next half-hour reading out the numbers already given in the press release]. We will now begin the question-and-answer session.

Analyst 1: Sir, why is the EBITDA growth falling?

M: Thanks for your question. As we have already stated, EBITDA growth has bottomed out and we see recovery in the upcoming quarters. All the macroeconomic tailwinds are now perfectly aligned for meaningful EPS growth.

Analyst 2: How is the operating environment currently?

M: The operating environment remains challenging due to multiple domestic and global headwinds. However, we have successfully navigated the storms.

Analyst 3: So, in a way, you are saying that the worst…

M: …is behind us. Yes, thank you!

Analyst 4: [Asks a super specific question on a sub-sub-segment which contributes less than 2% to the topline]

M: I think this is a very valid question. This segment is one of our priority areas. As we have said, growth has bottomed out… [proceeds to repeat the first answer, but in different words]. So, to conclude, we can safely say that…

Analyst 4: …the worst is behind us?

M: Bravo!

Moderator: That concludes this conference. Thank you all for joining us.

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